If Asian equities really offer the kind of rollercoaster ride that he describes, Robin Parbrook must have a strong stomach.
During 20 years of investing in the region, the Schroders manager has reached some pretty clear views – and one of them is that you cannot successfully run an absolute return fund there.
Parbrook runs two funds that appear in our Asia Pacific equity analysis: the Schroder ISF Pacific Equity fund and the ISF Asian Total Return fund. The Total Return fund, which he co-manages with Lee King Fuei, has delivered the really eye-catching numbers and is now soft-closed but both funds have outperformed over three years.
‘Asian equities are traditionally a big roller coaster, they shoot up to three times price-to-book and everyone thinks everything’s wonderful, they collapse to one times price-to-book, which is what they’re doing at the moment, everything’s doom and gloom,’ he says.
This is quite a defined pattern, he explains, so his process aims to take the best bits of long-only or index-relative investing and combine them with absolute return techniques. So the Total Return label on his fund was very deliberately chosen.
‘The fund’s not called absolute return because in my view it’s impossible to run an absolute return fund in Asia,’ he says. ‘There’s a standard definition of absolute return we use in Schroders which I think is pretty much the industry one: there should be no material losses over rolling 12-month periods. In Asia you can’t deliver that without giving up all the upside, realistically, because you can’t short in many markets.’
Even in those markets where you can short, the availability of shorts is very limited and expensive, he says. ‘Asian equities is one of the most volatile asset classes in the world, you just can’t deliver absolute returns and no material losses. So we call it total return, or beta variable.’
Not rocket science
However you choose to describe it, no investment process should be rocket science, Parbrook believes. ‘An investment process is just the way in which you get your team to work together properly and hopefully get the best ideas synthesised into a portfolio,’ he says.
So his rules sound simple. ‘We select our long-term best stock picks in Asia which tend to be skewed towards domestic companies, good consumer businesses, long-term growth plays and those that allocate capital correctly.’
Every asset class and region has its own unique characteristics, however, and Asia is no exception. ‘One of the peculiarities of Asia is that a lot of companies are state-owned, or very heavily state controlled or influenced,’ Parbrook says. ‘China is a classic example where all the banks, all the oil companies, all the telecom companies, these are state-owned enterprises.'
'So we tend to ignore those companies. In most cases we don’t think these are shareholder-friendly. Instead we focus on the more mid-cap, long-term companies we think create shareholder value, pay dividends in a disciplined way, and invest in a disciplined way.’
For the Total Return fund, Parbrook and his co-manager ignore the Asian index. ‘We just want basically 50 or 60 best ideas,’ he says.
Profusion of analysts
In a recent interview with Citywire, veteran emerging markets investor Kristoffer Stensrud pointed out that Tata now has more analyst coverage globally than Citigroup.
This is no surprise to Parbrook. ‘The number of brokers covering Asia has been growing for the past five years, as everyone’s decided Asia’s strategically important. It harks back to 2005/2006 when the Asian market started taking off and Jim O’Neill invented his BRIC concept.’
Parbrook finds this growth in coverage useful, although not in the way you might think. ‘It helps because it makes markets more inefficient. Good analysts should help in price discovery and make markets more efficient, but because there are more stockbrokers around, and there’s a limited pool of genuinely good staff, we think research in general is worse now than it was five years ago.’
Much of the broker research is also geared towards the short term, Parbrook says, as it aims to cater for hedge funds. ‘There are some good hedge funds and some bad hedge funds in Asia, but some of them will turn over their portfolios very rapidly so a lot of the research is geared up to nonsense trading stuff, rather than trying to provide any fundamental insight.’
That doesn’t mean, however, that short-term volatility is entirely a bad thing. ‘Volatility brings opportunity,’ says Parbrook. ‘Clients get scared of volatility, but in reality, when you get severe volatility, that’s when a good disciplined fund manager, over the long term, can make you some money.’
Looking at the performance of the Total Return fund in particular, you can see that Parbrook successfully avoided the worst of the 2008-2009 downturn. So can he do the same this time around?
‘2011 is panning out remarkably similar in terms of market patterns to 2008. So at the beginning of this year we were quite defensive, at the beginning of 2008 we were quite defensive; as we’ve gone through the year and markets have collapsed, we’ve been selling the utilities and telecoms stocks to buy the higher beta names that have collapsed. We were a bit early doing it in 2008 and we were a bit early doing it this year as well. But I’m not too worried about one month’s performance.’
For the Total Return fund, much of the capital preservation comes from the hedging overlays.
‘We have two levels of hedging that aim to provide reduced volatility and capital preservation. In 2008, we had a good first eight or nine months because we had a lot of hedges in place, as has been the case this year. We then took them off timing-wise a little early. But if you took 2008- 2009 together the Total Return fund did extremely well. If you looked at just September-October 2008 it didn’t look so pretty, and this year’s panning out much the same.'
‘At the moment we’ve still got quite a lot of hedges in place. In an absolute context we are seeing losses, although up to the end of August we were doing well and avoiding most of the worst of the losses.'
‘Markets are now down to just under 1.5 times price-to-book, traditionally in Asia when you get down to 1.3 times price-to-book you should take off all your hedges and be fully invested. So we’re getting down to levels where we should be reducing our hedges. Our models are still saying not to, but we are structurally quite cautious on markets.’
What’s he nibbling at?
At the time of writing, Parbrook had a significant cash holding, but he had also just started buying selectively – ‘nibbling’, as he calls it. So what is he nibbling at?
He says his stock selection, having been very defensive at the start of the year, is now more in line with markets.
He has no utilities at all in the Total Return fund. ‘Most utilities in Asia don’t operate under secure regulatory frameworks, outside Hong Kong where there is a very secure regulatory framework. But the Hong Kong utilities are too expensive so we don’t own them.'
‘We did have a reasonable amount in telecoms at the beginning of the year, but obviously telecom stocks have held up pretty well during the market falls of the past two months, so we’ve sold all our telecoms stocks – with hindsight we sold them a little bit early.'
‘We’ve been nibbling away mostly at Asian domestic names. We are overweight consumer stocks by quite a big chunk in Asia, and it’s slightly more towards the consumer cyclical end. Then we’ve got quite a lot of property, mostly investment property in Hong Kong and Singapore so it’s retail shopping malls, offices – not property developers.'
He’s looking for Asian domestic income streams in relatively defensive, lowly-geared companies, that ideally give a bit of dividend income. And gradually nibbling at some of the more industrial names or global names in Asia such as Giant in Taiwan, which makes Giant and Trek bikes.
‘It’s the world’s second largest bicycle firm and half its sales are in Europe and the US, half in Asia. It’s bounced a bit very recently but it was getting sold off because everyone was panicking about it being an exporter in global sales, but actually half of it is an Asian business.'
‘So we’re looking at companies where they have good strong momentum and are balanced businesses that have been oversold. Companies like Johnson Electric, which makes micro motors which mostly go into cars, it’s almost halved so it looks quite interesting.’
Gloomy macro outlook
But while Parbrook sees lots of opportunities for Asia, his view on the global macro situation is pretty gloomy.
‘I have no idea how Europe ends up, other than to say it’s liable to be messy,’ he says. ‘We are cautious on China. We think China’s more likely to have a hardish landing, which we would define as official growth coming down to 5 or 6%, real growth probably less than that.'
‘Global recession – you’re going to get that anyway. We papered over what was going to be a nasty global recession by printing bucket loads of money in 2009. It hasn’t worked, there’s been no structural reform, Europe hasn’t taken on the reform it needs. So this time I think the US grinds lower in a Japanese-style depression.’
There won’t be any offset from China this time round, he warns, because of how the Chinese responded in 2009. ‘They printed loads of money which is about to crystallise in non-performing loans in the banking system. You can see that the stress is starting to appear.'
‘China needs to have this rebalancing from a fixed asset investment society to a consumer-driven society, which is good news because that’s what the West needs.'
‘That’s all part of a global rebalancing, but getting from A to B could be quite painful for both China and the global economy. But we’ll get there in the end – I’m not one of these perma-pessimists that think the world’s going to implode, but it’s going to be a painful process.'
‘China is still an accident waiting to happen. A lot of people have been mis-sold China. $100 dollars invested in the MSCI China in 1992 would now be worth $60, so never believe the fallacy that stock markets and economies have a wonderful correlation.’
Once Chinese property companies are going bankrupt and the banks start to admit to these non-performing loans, he says, we may see some panic and redemptions in the BRIC funds. ‘BRIC’s a nonsense concept anyway,’ says Parbrook. ‘But that’s when you can get really excited about markets and I think we’ve reached the tipping point. China can solve its problems, and the rest of Asia outside China looks in good health.’
This article originally appeared in the October 2011 edition of Citywire Global.